Cowen expected to blame ECB for bouncing Ireland into Troika bailout
Former Taoiseach's evidence to the Banking Inquiry is expected to be explosive given his central role in the crash, writes Daniel McConnell
Former Taoiseach Brian Cowen returns to the Oireachtas Banking Inquiry on Wednesday to account for his time at the helm between 2008 and 2011.
Given the death of his finance minister Brian Lenihan in June 2011, Cowen is the most central player in Ireland's economic demise left alive.
His evidence to the Inquiry about his time as Taoiseach is expected to be explosive.
It will cover the night of the September 2008 bank guarantee.
Cowen will have to address the accusations that he overruled Lenihan on the shape, size and scope of the guarantee.
He will have to account for the decision to nationalise Anglo Irish Bank in January 2009, the decision to establish Nama, the repeated decisions to stuff many billions of taxpayers' money into the banks, but ultimately he will have to explain his management of the country which lost its economic sovereignty in November 2010.
His appearance is without question the centrepiece of the lengthy Inquiry's hearings and will seek to explain for the first time in detail why he took the actions he did and the motivations for doing so.
THE 2010 BAILOUT: At the Inquiry, Cowen will undoubtedly talk about the country's slide into the clutches of the Troika at the end of 2010.
It is believed Cowen will give vent to his belief Ireland was bounced into the bailout by agents of the ECB and other EU institutions.
At the end of September 2010, Lenihan announced the full ¤50bn costs of the bank recapitalisation programme to widespread shock.
Cowen and Lenihan were furious when in mid-October, German chancellor Merkel and French president Sarkozy declared that a new permanent euro area financial rescue fund to be set up by 2013 would require private sector creditors to accept some debt restructuring.
Referred to as the Deauville Declaration, it did massive damage to Ireland as it appeared there would be no European assistance for us having bailed out our banks in 2008.
In early October, Lenihan received a letter from the ECB president expressing concern about the situation of Irish banks.
Four days later, EU Commissioner Olli Rehn visited Dublin.
On November 12, the ECB Governing Council decided it could not sustain its large exposure to Irish banks.
Sources have said that Cowen believes it was on this same day ECB/EU sources began off-the-record media briefings leading to reports that Ireland would need a bailout and that discussions were underway.
Cowen is expected to say that there were internal discussions with himself, Brian Lenihan and key officials, but they were clear that in any discussions that were to take place, it would be "talks about talks".
Like Former Dept of finance chief Kevin Cardiff in his evidence to the committee, it is known Cowen believes the off-the-record briefings were clearly trying to make it look like an Irish bailout was inevitable.
Former Cabinet sources have said Cowen was irate at this railroading of a sovereign country by shadowy forces and made it known it was completely unacceptable.
The Cabinet was brought up-to-date about the situation that was developing.
One former Cabinet insider has said Cowen did not like the persistent anonymous briefing against Ireland which he and Lenihan saw as a blatant and outrageous effort to bounce a fragile, weak country into a corner.
But when it was agreed in Brussels that members from the IMF would travel with EU officials to Dublin to continue the exploratory talks, Cowen and Lenihan were wrongfooted.
It is expected to be revealed that the embattled Taoiseach underestimated the impact of the IMF coming to town on the Irish people and international observers of Ireland.
He and Lenihan realised that the images of Ajai Chopra and other officials walking the streets of Dublin immediately sent a message that this was now a done deal.
Cowen is also likely to be challenged by the Inquiry on Central Bank Governor Patrick Honohan's decision to take to the national airwaves on Thursday, November 18 to say a deal was imminent.
Sources have said that Cowen believes Honohan's outing on RTE's Morning Ireland only further reinforced the perception that a bailout deal was only a matter of time. Cowen felt the manner in which events played out was deeply damaging to the Government because it looked like Cowen and Lenihan were keeping what was going on away from people, several former ministers have said.
Mr Cowen is also expected to be pressed by Inquiry members about the threatening letters sent by ECB President Jean Claude Trichet which threatened the withdrawal of ECB funds if Ireland didn't apply for a bailout.
It is known that he in particular did not receive Trichet's letter well.
The Inquiry is also expected to probe Cowen on attempts to impose losses on senior bondholders at that stage as part of the bailout deal. Cowen, Lenihan and their officials tried to see if there could be burden sharing.
It is believed that Cowen and Lenihan were told that IMF personnel in Dublin were minded to allow it, but there was total opposition to it when it was referred to more senior officials who discussed it with some of the big country contributors to the IMF.
Timothy Geithner, US Treasury Secretary, was opposed because he claimed it would totally undermine market access for those European countries that were in trouble. The ECB was opposed to it for the same reason.
Cowen and Lenihan were forced to concede the point.
As he said to the Inquiry last Thursday, without the EU Commission, ECB and IMF all being in agreement, it was not possible to have the burden sharing issue included in the programme.
Any attempt by us to burden share with senior bondholders would mean no programme for Ireland.
But several sources have told the Sunday Independent, that Cowen is likely to be deeply critical of the ECB's role in Ireland's eventual application for a bailout.
By September 2010, Trichet and the ECB began to articulate concerns to Minister Lenihan about the darkening international clouds hanging over the Irish banks.
The ECB was very concerned about the large commitment where they were continuing to make liquidity available to our banking system and they wanted restructuring proposals.
Cowen was of the belief that the ECB was more hawkish about the size of the budget cuts needed for Ireland in order to satisfy the market.
Cowen is absolutely convinced, and it became very clear to him, that people were trying to bounce Ireland into a programme.
But it is understood that Cowen believes there were agents of the ECB and other EU institutions who were feeding the stories to the international media with that agenda in mind.
Subsequently, the rumour machine went into overdrive from what were termed generally as euro zone "sources" that suggested we were applying for an EU/IMF programme.
Cowen is also likely to say that the pressure on Lenihan, who had to go to EuroGroup and Ecofin meetings that week, was intense.
The ECB were at all times pushing for this position of Ireland being in a programme without explicitly confirming it would continue to support the Irish banking system.
It is also understood that Cowen will tell the Inquiry that the Troika wanted to view the Coalition's four-year plan even before the Cabinet had seen it, but that was flatly refused.
"Cowen was adamant that wasn't f**king happening," one former Cabinet minister has said. "There was no question of that happening as far as we were concerned," the minister added.
The EU/IMF programme was finalised and adopted by the Government on November 27, 2010 and one additional year was allowed to reach the 3pc general deficit threshold.
THE 2008 GUARANTEE: Without question, a major focus of the Inquiry's hearing will be Cowen's recollections, thoughts and motivations on the night of the Bank Guarantee on September 29, 2008.
At the Inquiry previously, Honohan and Cardiff have offered up the narrative that Cowen overruled Lenihan on the night as to what sort of action would be taken to rescue the banks.
Honohan and Cardiff have said that Cowen had his mind made up in favour of a broad guarantee covering the six main banks, while Lenihan wanted Anglo Irish Bank nationalised.
It is believed Cowen will offer further detail as to why he felt Lenihan and Cardiff were wrong on the night and why he preferred a more comprehensive approach.
He gave voice to this in his appearance last Thursday when he strongly defended the €440bn blanket Bank Guarantee as the most decisive step the Government could have taken on the night to deal with the problem.
But of most interest is how exactly he and his finance minister came from a position of being on opposite sides to one of agreement, on a night of great drama, tension and stress.
Cowen will be pressed on the series of meetings in Government Buildings, which commenced at 6.15pm on Monday, September 29, after a day of turmoil on the markets.
These meetings took place in the meeting room adjacent to the Taoiseach's personal office and several of the participants have already given evidence to the Inquiry about the night's events.
As the meeting began, the seriousness of the discussion became clear very quickly, to the senior officials from the Department of Finance, the Central Bank and the Financial Regulator.
The Central Bank Governor and ECB Board member, John Hurley, began the meeting by recapping what happened during the day and warned that Anglo was out of money and would not be able to open the following day.
He referred to a situation which had developed at Anglo where it had lost €2bn in deposits that day and they expected the rate run to continue the next day.
An earlier belief that Anglo had enough cash to survive the week was now shattered.
The crisis was going to have to be addressed immediately. Bank shares were down in the stock market and he pointed out that Anglo had run out of cash.
It is believed Cowen will say that he asked Hurley to outline what the view of the ECB was and to provide an update as to what the ECB's position was.
Hurley had spoken with Trichet and confirmed to the meeting that there was no euro-wide initiative in the offing.
As Cowen stated to the Inquiry: "It was clear that we were on our own, we would have to deal with this at a national level."
The position of the ECB was that no bank was to be allowed fail because of the contagion effects that could ensure in the euro area. In other words, there could be no "Lehman Brothers" type event in the euro area.
Sources at the meeting have said Hurley made the point that we would have one go at addressing this and if it did not work, we may not get a second chance to revisit it as confidence would be gone.
Where a first initiative may be deemed inadequate by the market, putting forward a second course of action could then completely undermine our credibility.
It is expected that Cowen will tell the Inquiry on Wednesday that Hurley's warning and outlining of how serious matters were had an immediate impact on all present.
Lenihan contributed to the meeting at this point and agreed with the analysis and the up-to-date position given by the Governor. He indicated that he felt part of the solution would be the nationalisation of Anglo.
Cowen did not think that nationalisation should be the first course of action and he said so.
Cowen's first thoughts in assessing the situation was that he did not find the nationalisation option attractive as a first response.
Nationalisation option was in effect an open-ended guarantee. The guarantee option looked like a safer option if it was time limited.
But according to sources, Cowen was concentrating most on how to get liquidity back into the system and quickly.
But at this point, another key intervention occurred when Patrick Neary, the Financial Regulator, confirmed to the meeting that all the institutions had sufficient capital and were solvent.
But sources have said Cowen was adamant and will tell the Inquiry he was of the view that allowing Anglo to fail was simply not an option on the night. It would in Governor Hurley's words, "set the country back 25 years". As the night progressed, the options were narrowing down to a nationalisation plus a guarantee or simply a guarantee of the system itself. Other options raised by Merrill Lynch were ruled out. Sources present on the night said that no decision on the table was risk free.
Cowen was of the opinion that there was no one good or right option that would guarantee a solution to the problem. It was about trying to pick the 'least worst' option.
Again, Cowen and everyone else in the room were in the dark as to the real scale of losses in the banks and at no stage was it contemplated that the funding gap for the banks would reach the levels that it did.
It was at that stage that word came into the meeting that the chairman and CEO of the two main banks (AIB and Bank of Ireland) wanted a meeting.
Cowen ordered a break.
Cowen then at this stage phoned Alan Gray, an economist and a Central Bank board member, for advice.
Gray was someone Cowen relied upon and respected.
It is known from Gray's previous public statements that he said that providing a guarantee would obviously give an advantage to those institutions to whom it would apply vis-à-vis competitors, since they would have the backing of the Irish government.
He said it would be important to be seen to charge a proper fee for the value of that guarantee to those institutions who got the benefit of it and that it should be strictly time limited.
But also during this break, as Cardiff said in his testimony to the Inquiry, Cowen and Lenihan went off for a private discussion.
It is already known that the pair again weighed up the options in Cowen's personal office. The Inquiry has already heard that Lenihan favoured the nationalisation route for Anglo and guaranteeing the rest of them.
Cowen had outlined his concerns about it and reassured him that nationalisation was something that could not be ruled out in the future. Cowen has told colleagues that the discussion between himself and Lenihan was cordial and was absent of aggression.
"They were both deliberating with each other and striving to find the best course of action for the country," one senior source has said.
The senior bankers (Eugene Sheehy and Dermot Gleeson from AIB and Brian Goggin and Richie Burrows from Bank of Ireland) were brought in and they confirmed the Government's worst fears.
Cowen and Lenihan were informed that the money markets had decided that Irish banks were to be avoided.
The banks were concerned about INBS as well as Anglo and they wanted to be differentiated from those institutions in that respect.
Without stating it openly, it was clear that they wanted those two institutions nationalised and a guarantee to be provided for their institutions.
At this stage, Kevin Cardiff told the meeting that nationalisation of Anglo and a guarantee for the rest of the banks was his preference.
But Cowen again, according to sources, remained of the view that they needed to keep the solution as simple as possible.Hurley emphasised again that they had only one go at it and they needed to convey a message that was easily understood for it to work.Then Cowen put it to the meeting that only a full guarantee option provided the best prospects of addressing the urgent liquidity problem. The meeting agreed and it was then a case of working out the details. The meeting went on to discuss what way a guarantee would be structured.
The bankers were dispatched and then it came to the issue of how to treat bondholders. The Inquiry members are set to press Cowen on the decision to include senior and junior bondholders in the guarantee.
It was deemed prudent to include them for fear of driving away sentiment.
Also, it is likely to emerge, according to sources present on the night, that Lenihan was absent from the meeting having been sent home by Cowen, when it was decided to include junior bondholders in the guarantee.
It was decided that given the uncertainty that was in the market, it might be best to include junior bondholders on balance as they were a very small percentage of the total securities that were covered.